Financial Crisis of 2008: Impact on the USA and Japan

Without a doubt, the financial crisis of 2007-2008 has damaged the financial stability of
governments and nations globally. However, not all countries had an equal amount and impact of the
damage. Due to the differences in their governments' legal and economic laws, some countries were
hit the hardest. Governmental institutions and entities had to majorly reform policies, set newer and
stricter guidelines, and increase their governance and banks' regulations. While some other countries,
had a strong foundation from the beginning and made minor changes to their laws. As such, this
report will examine two countries' banking systems, Japan and the United States of America's (USA)
bank structure, payment system, and the aftermath of the 2007-2008 financial crisis and how they
implemented and increased new regulatory policies on them.

The financial crisis originated from the USA's banking system when it allowed risky
borrowers to take sub-prime mortgage loans more than the bank's budget allowed at that time. The
continuous lending made them short on money liquidity. Which made the USA banks mostly due
because of their extended lending, and at the same time, they were buying more financial assets. In
the end, US banks' reckless financial behavior led them to significant financial losses, banks going
bankrupt, property prices crashing, and the most prolonged and most devastating financial recession
that hit the USA and extended to the rest of the world.

The USA's banking systems are dominated by three types of financial intermediaries,
distinguished by their liability type. First, depositary institutions, which liabilities are categorized as
deposits, include commercial banks, which constitute the most important financial institution, credit
unions, savings and loans associations. Second, contractual savings institutions, which liabilities are
categorized as long-term future interest, include pension funds, mutual funds, and insurance
companies. Third, investment intermediaries, which liabilities are classified as short-term money and
capital market securities, include mutual funds, investment banks, and securities firms.

The most essential tool for the financial system is the payment system. It is an integral part
of a well-functioning and sound system. All individuals continuously use it in societies, businesses,
and government processes. The USA's payment system is split into two main parts, wholesale and
retail payment. The wholesale payment system is used to transfer a large sum of money within a
critical period electronically, settle forex and real estate transactions, and repay loans. In contrast, the
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retail payment system deals with small transactions in both amount and value. Examples of retail
payments are debit and credit cards, in which their transaction is being made electronically. It is used
to transfer payroll, business-to-business transactions, e-commerce payments, tax payments, bills, and
loan payments.

The USA has gone from being the most prosperous country globally to have one of the worst
recessions in history. The returns on equity and return on assets have gradually fallen three years in a
row from till the financial system had finally collapsed. After that, it barely started to make minor
improvements and got back on track. It began to regain consciousness when major financial
institutions paid back their loans, such as JPMorgan, Citigroup, and many others. In 2010, the USA
started to adapt to strict regulations on banks and make slow economic improvements. This has
resulted in a more complicated system that is under rigorous inspections and heavy regulations. Also,
it introduced new acts to ensure financial soundness from loopholes and weaknesses. It implemented
reforms on regulatory agencies, like the office of the controller of the currency, federal reserve
system, and federal deposit insurance corporation that all work at a federal level. The US government
has initiated many different programs to aid the crisis. One of them was the Troubled Asset Relief
Program, where the government has bought assets and equity shares from bank institutions by a half
of a billion dollars. This program aimed to indirectly boost the banks' capital strengths and bring
back confidence and soundness to the system by removing doubtful assets.

Over the 80s and 90s, Japan's banking system had faced several financial crises due to the
decline in the domestic economy, relying on imports from other countries, and excessive lending
from banks. Therefore, this has put Japan in a pool of debts that harmed the banking system and
caused numerous financial entities to go bankrupt. However, Japan has set many new policies and
regulations as a rebuttal to the frequent blocks that have overcome their system and prevent future
damages that might hit them later.

Similar to the US, Japan has a relatively complicated structure of its financial sector.
However, Japan is categorized as public and private and classified furthermore into four groups.
First, the private deposit-taking institution includes the city and regional banks, trust banks, and
foreign banks. Second, private non-deposit-taking institutions include insurance, leasing, and
investment offered to individuals and firms. Third, public financial institutions that play a significant
role in the Japanese financial system. They are development entities that give out direct lending to all

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sectors of the economy, such as agriculture, housing, and municipal enterprises. Fourth, Japan post
bank, which is the largest and most influential institution in Japan. Before the crisis of 2007, the post
bank was owned by the government but then decided to privatize it. Which then led to the
segregation of the post and political issues that is yet to be solved.

Unlike the USA, which has two payment systems, Japan has four, in which three are
considered private, and one is public owned by the bank of Japan. First, The Zengin Data
Telecommunication System (Zengin System) is mainly used for retail-related payments. Its primary
function is to clear retail credit transfers. Second, The Bill and Cheque Clearing Systems (BCCSs) is
used to pay commercial-related bills and cheques for firms in some areas of the country. Third,
Foreign Exchange Yen Clearing System (FXYCS), which is used for wholesale forex transactions.
Fourth, BOJNET, Japan's central bank, used to settle others' obligations and liabilities, the same as a
federal bank of the USA, but with additional features.

Due to Japan's early crises, it had set strong laws and acts that reformed restricted banks
from excessive lending and action that could damage the financial sector. Although Japan's
shortcoming in terms of profitability and growth, when the recession of 07' and 08' happened, Japan's
financial system was not as damaged as the American system. Japan did not hold a significant
number of sub-prime mortgages as it did nearly two decades prior 2007 crisis when Japan faced real-
estate decline. Besides, it did not hold much of the USA sub-prime mortgage either, which worked in
their favor since no bank in Japan has failed due to this particular reason. However, Japan did suffer
from losses, fallout, and stock collapses due to the crisis. As mentioned before, Japan has undergone
many policies and acts to lessen the damage to financial crises. Therefore, many of the regulations
happened before 2007, due to their crises in the '80s and 90's. Traditionally, the central bank of Japan
did the function of supervising and inspecting other banks. Nowadays, this task has been transferred
to the ministry of finance.

In conclusion, financial crises have shown the similarities and differences in how the
countries were affected, impacted, and revived through their reforms of the financial system. It has
been evident that some countries were more affected than the other countries. It has been proved that
Japan suffered fewer costs than the United States of America due to their techniques in financially
managing loans. The only similarity between the two countries is that they let a government-owned
entity supervise the financial institutions. The main differences were in the payment system and

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regulations. The united states only have two payment systems, wholesale and retail, whereas Japan,
has four payment system with a detailed set of function, Zengin System, BCCSs, FXYCS, and
BOJNET. Regarding regulations, Japan had fewer setbacks and losses than America due to the small
relative amount of sub-prime mortgages they have loaned and their foundation of policies that have
been implemented before, during, and after the crisis.